1

Prerequisites for an Ideal Society by W B Vosloo* – Wollongong, June 2013

Arguably, informed and engaged citizens would give preference to a political-economic order that is stable, just, prosperous and democratic: - a stable governmental system which is associated with a climate of confidence, civic law and order as well as personal safety; - a just system distributing available resources, opportunities and basic services (such as education, health and housing) equitably; - a prosperous economy based on a sustainably strong growth rate and dynamic job creation; - a democratic system which requires that those in power are held effectively responsible to the governed with effective checks and balances between branches of , competitive political parties, regular , freedom of speech, association and communication media, and where civic rights are constitutionally safeguarded.

To build such a preferred society, requires certain essential prerequisites to be met.

Creating a Climate of Stability, Law and Order and Confidence

For any growth generating investments to succeed – either from domestic or foreign sources – a country needs to create a climate of stability, law and order and confidence. Such a climate can only be built on predictable stable currency values and productivity-enhancing policies, if labour relations are not disruptive, the tax system is not punitive and the political-economic order is clearly committed to free market principles. The path to economic growth lies in building businesses, not barriers to business enterprise. need to serve and facilitate enterprise, not to supplant or constrain it with unnecessary burdens.

Choosing an Appropriate Political Economic Order

The alternative options from which to choose an appropriate political-economic order should be clearly understood. On the one hand stands the market economy approach with its emphasis on free enterprise, individual initiative, entrepreneurship and productive efficiency. On the other, stands the command economy approach with its formal commitment to egalitarianism, welfare services and social security based on government intervention and control and bureaucratic provision.

Most countries in today’s world are likely to be running a mixed economy that combines free- market features with government intervention. But sharp questions need to be asked about the nature of the mix – or the direction of the tilt. It is necessary to figure out what governments should do and can do well and what governments should not even try to do. Some lessons may be learnt from the trials and errors of recent world history and an active public debate needs to be focused on the choices to be made.

Socialist rhetoric has lost much of its appeal and political momentum – whether in the first world form of social , centralist Marxism/Leninism or in a variety of third world formats. Socialism has not lived up to its promises.

Marxism/Leninism and Third World Socialism invariably led to authoritarian one-party rule or even one-man and the violation of human rights. Today it is clear that – 2 either of the East European, Russian, “Third World”, or Chinese variety – is not an aberration. It is an inherent and inevitable mode of socialism. Egalitarian social engineering can only proceed by means of an omnipotent state. In the communist countries of Russia and Eastern Europe, technology, innovation and productivity have fallen far behind most Western countries. Corruption, black marketeering, bribery, theft and alcoholism became endemic. The egalitarianism which is the moral imperative of socialism has remained a utopian promise. Instead it created a “new class” of party “apparatchiks”, bureaucrats, managers of state enterprises and superstars in the arts and sports.

Emerging from colonialism many Third World countries turned to socialism not only as ideology, but also as a perceived “necessity”, because it seemed the only way to solve their economic problems. They had no middle class to act as entrepreneurial force. Hence they insisted on the nationalisation of manufacturing, mining and agriculture and placed economies under centralised controls. The results have been disastrous. Government management of production has been poor and often corrupt. Without material incentives, productivity has plummeted while the population explosion has led to a net decline in living standards for nearly all African States. It has been most pronounced in those espousing socialism, eg. Guinea, Zambia, Tanzania, Burma and India in the pre- 1990s period. Those third world countries that managed to avoid centralised economic planning and that have adopted some degree of private initiative, have achieved the most impressive economic gains, eg. Malaysia, Thailand, Indonesia and Chile.

Even so-called “social ” are plagued by the bureaucratic bondage and economic stagnation of the “welfare state”. As a result of near confiscatory tax policies, they reduced rewards and they discouraged incentive and innovation. Income-levelling experiments in Britain, France, Germany and Scandinavian countries have proved that an economy without rewards for success produces social decline – a situation where there is little incentive for anyone to do more than the minimum necessary to maintain his/her own standard of living. The “welfare state” mentality of dependency is not conducive to positive values such as a strong work ethic, self reliance and creativity. The connection between costs and benefits – factors which economically belong together and which should be psychologically connected – are systematically kept apart by the bureaucratised welfare state provisions. Forced egalitarianism destroys freedom and creativity. Complete equality can only be enforced by dictatorship. In his commentary on the excesses of the French Revolution, Lord Acton wrote: “The fatal passion for equality made vain the hope for freedom”.

Together with the large number of public sector employees, the welfare state produces so many recipients of social benefits that those dependent on the public purse comprise a majority of advanced country populations. A society, where the redistribution of wealth overshadows the production of wealth, cannot survive. It can only end up distributing or sharing poverty. Redistribution discourages effort and self reliance.

The Challenge of “Capitalist Interventionism”

Many interventionists point to the apparent success of government intervention in the economies of East Asian countries in the post-World War II period of reconstruction: Japan, Taiwan, South Korea and . They argue that governments in these countries intervened quite aggressively to alter the patterns of trade, industrial output and consumption in ways it thought desirable. It used public enterprises as instruments of a conscious development strategy and protected parts of the economy from import competition and it used rules on inward investment to promote selected 3 industries. The economic performance of these countries is beyond dispute. How is it to be explained?

A World Bank report on the “East Asian Miracle” explained that most of East Asia’s extraordinary growth was due to superior accumulation of physical and human capital. These economies were also better able than most to allocate physical and human resources to highly productive investments and to acquire and master technology. Although the high performing economies used very different combinations of policies, a common thread is the application of a set of market- friendly economic policies, leading both to higher accumulation and better allocation of resources. Where selective interventions succeeded they did so because of three essential prerequisites. First, they addressed problems in the functioning of markets. Second, interventions took place within the context of sound macro policies. Third, their success depended on the ability of governments to establish and monitor appropriate economic-performance criteria related to the interventions. In addition, the leaders of the high-performing East Asian economies based the legitimacy of their governance on the principle of shared growth. A variety of institutional mechanisms were created to achieve wealth-sharing without stifling growth eg. universal education, equitable land holding and reform, small and medium enterprise (SME) promotion, targeting housing programmes on low- income households, building a reputable civil service (merit-based recruitment and incentive-based compensation), as well as developing co-operative business-government relations.

Non-economic factors, including culture, politics and history, are also important to the East Asian success story. The 1993 World Bank report stated “... there is still much to be learnt about the interactions between policy choices and institutional capability and between economic and non- economic factors in development.”

Since these words were written in the early 1990s, mainland China emerged as the predominant economic giant of East Asia. China’s meteoric development only started after the mismanagement of Mao Zedong Communist rule was replaced by the Confucian pragmatism of Deng Xiaoping in 1978. The 11th Congress of the Chinese Communist Party made a break with and adopted Deng’s proposals to take practical steps to deliver economic growth by way of “household responsibility” in agriculture and manufacturing – “building socialism with Chinese Characteristics”. The Chinese economy has continued to grow spectacularly since Deng Xiaoping introduced the incentives of the market system.

But there are also other counter arguments to consider. In scores of developing countries state intervention failed damagingly. The main reason being that state intervention is an extremely complex task which calls for special skills and flexibility. Most politicians and bureaucrats are not generally regarded to possess these qualities.

Benevolent state intervention also requires strong executive power and less sensitivity to democratic responsiveness on the part of the government of the day. It appears to call for a “benevolent dictatorship” style of government. A nagging problem experienced in all the “Pacific Rim” countries is the challenge to prevent special interests from “capturing” interventionist policies for their own benefit. A further nagging, if not insurmountable, problem is how to keep “benevolent ” in a benevolent mode.

4

Containing the Creeping Government Bureaucracy and its Parasitic Adherents

In today’s world, government plays a major role at just about every main juncture of our lives: from the cradle to the grave. The modern “welfare state” endeavours to provide its citizens not only with protection of persons and property, but also with certain minimum aspects of the good life, such as formal education, health care, housing and infrastructure, social benefits and protection against loss of jobs or business. It invariably requires the rich to be heavily taxed to pay for the poor.

We have become accustomed to the intervention of government in its ascribed role as the main gap- bridger and redistribution agency. This form of mixed economy is normally described as the “Social Democratic Market Economy Model” or the “Social Market Model”. Both models assume that the state should take the responsibility for maintaining the basic socio-economic fabric of society to the extent that the market does not provide. But what are the pitfalls?

Today serious questions must be asked about the ability of the state to accomplish benevolent goals through collective provision. When you ask the state or government to do something or to intervene, you are in effect asking civil servants to come into action. Hence you are inviting bureaucracy. While there are many highly competent and dedicated public servants, the number of persons on the public payroll who are not earning what the taxpayers are paying them is one of the most daunting challenges of the modern state. It is significant to note that in most countries emoluments of civil servants and politicians make up 50 to 60 percent of all government spending. In the Anglo-Saxon world, public sector employees have more generous pension and workmen’s compensation rights than the majority of private sector workers who provide the bulk of the tax payments that flow into the public purse. To add insult to injury, the Anglo-Saxon world is also replete with a flourishing cohort of lawyers rorting the compensation system.

This means that any reliance on the state to perform any task is more likely to increase job opportunities and benefits for civil servants and the “shadow” parasite economy than benefits for the general taxpaying public. In addition, it must be noted that most modern countries have introduced “collective bargaining” practices into the public sector. But they have transferred the practices evolved in the private sector without its concomitant “checks and balances”: the discipline of the “bottom line”. Hence the beneficiaries of the outcome (i.e. civil servants and politicians) sit on both sides of the bargaining table. The taxpayer’s real interest is not represented. This problem has taken on gigantic proportions in most modern democracies.

Avoiding the Dangers of Debt Traps

Most modern social democracies tend to overspend, i.e. their expenditure outpaces their income. As a result of chronic deficit spending they are drowning in public debt without any credible exit strategies. In many instances they are already facing debt traps, i.e. facing situations where they cannot afford to serve their public debt obligations as a result of their chronic deficit budgeting. The dangers of a debt trap arises when the conventional deficit (total government expenditure minus total government revenue for any given year), as a percentage of total debt, is greater than the economic growth rate. High levels of accumulated public debt lead to high annual interest payments. If the debt is increasing faster than the economic growth rate, the government will have to keep borrowing to service its old existing debt. Under such circumstances a government’s ability to redeem old debt becomes highly problematic. When the government’s creditors (the bond market) no longer believe that the government will be able to finance interest payments through higher 5 taxation (let alone to redeem its debt), it will not be able to borrow. In such a case, government would be effectively insolvent.

Safeguarding Free Enterprise

A healthy scepticism must be retained about the effectiveness of state intervention in the economy. Bad planning by government drives out good planning by private people! Modern economies are much too complex to permit socio-economic engineering and masterminded intervention by public bureaucrats. In addition, special interests are generally inclined to “capture” interventionist policies for their own benefit.

For all its weaknesses, the free enterprise system holds out the most creative and dynamic force that any civilisation has ever discovered: the creative power of the free enterprising individual. We must re-focus on the true nature of economic development at the grassroots level in cities, towns and villages. Real economic development is a “do-it-yourself” process at grassroots level – but it can be helped by sound economic policies. We need to re-discover the enterprising individual who takes risks, breaks new ground and plays an innovative role in our economy.

Democracy’s Prerequisites

In the words of Abraham Lincoln, “Democracy is government of the people, for the people by the people”. It requires that the competing branches of government be controlled by checks and balances, that those in power should be elected by means of a contest between political parties, bolstered by free speech, freedom of association and unfettered communication media.

Democracy involves much more than periodic voting. It involves the presence of a civic culture based on public accountability, public responsibility and the paramountcy of the public interest under the .

Democracies depend on a “culture of compromise” coupled with accountability and limits on the power of the state. This enables democracies to avoid catastrophic mistakes or criminal cruelty as occurred under the unrestrained power of Hitler, Stalin or Mao. Democracies do not commit mass murders or permit large famines. Sometimes noisy legislatures and robust courts tend to undermine government action. But consider the alternative. Even if are faster or bolder, they are also more accident prone. Open and accountable government tends, in the long run, to produce better policies. No group of mandarins can justifiably claim that they know what is best for society. They have no “hotline” to the future. Autocracies tend to be top heavy and surrounded by secrecy and paranoia. Alternative views or arguments are harder to surface and transfers of power to be reigned by intrigue and violence. In the absence of effective accountability structures, policy making becomes plagued by corruption and inefficiency. A democratic constitution cannot, by itself, guarantee good governance, but it has a good chance to prevail if its proponents show success at good governance.

______* Dr W B Vosloo, PhD, Cornell 1965, is a retired former professor of Political Science and Public Administration, University of Stellenbosch, South Africa (1966-1981) and was Chief Executive of the South African Small Business Development Corporation, Johannesburg (1981-1995). He is now retired and has been living in Wollongong, NSW, since 1998.

6

Bibliography

Huntington, S.P. (1997) The Clash of Civilizations and the Remaking of World Order New York: Simon & Schuster Inglehart, R. And Welzel, C. “How Development Leads to Democracy”, Foreign Affairs, (2009) March/April 2009, pp.33-48 Olson, Mansur (1982) The Rise and Decline of Nations, Yale University Press, New Haven & London Olson, Mansur (2000) Power and Prosperity – Outgrowing Communist and Capitalist Dictatorships, Basic Books Palmer, T.G. (ed)(2013) After the Welfare State, Centre for Independent Studies, NSW Ranney, A. (1966) The Governing of Men, Holt, Reinhart and Winston Tanzi, V. (2011) Government versus Markets – The Changing Economic Role of the State, Cambridge University Press Yergin, D. and The Commanding Heights – The Battle Between Government Stanislaw, J. (1999) and the Marketplace That Is Remaking the Modern World, New York: Simon & Schuster